FDI is viewed as an instrument for exploring the resources, promoting industrial growth, enhancing the competitiveness of the domestic firms; and also promoting export particularly in developing countries. FDI maintains relatively open economies, stable macro-economic conditions and limited restrictions on foreign exchange transactions. It frequently stimulates competition, productivity and innovation. Further, it generates income and employment opportunities resulting in higher wages, competitive price, more revenue, skills and technology transfer and increased foreign exchange earnings. Similarly, it enhances entrepreneurial capability when the foreign firms bring with it some firm specific knowledge in the form of technology, managerial expertise, and marketing know-how. It also allows new local entrants to learn about exports markets, provide training for workers and stimulates competition with local firms. FDI plays significantly vital role for the country like Nepal which development efforts has been constrained by a number of factors.

In this more competitive and globalized world today, no countries are self-sufficient and self –reliant. Most economic theorists, development advocates and experts accept that external capital is necessary along with the mobilization of domestic resources for accelerating growth and industrialization. Today, every developing country irrespective of their size and political systems tries to attract foreign investment. A large number of developing countries have been trying to attract foreign direct investment by the multinational firms through creating conducive environment for investment. Countries are also concentrated on liberalizing their FDI policies by providing either incentives or deregulation. The establishment of Economic Zones (EZ) by some countries also reflects their efforts to attract foreign direct investment.

Foreign Direct Investment (FDI) is one of the most important factors of economic development in the contemporary world. Today, FDI is a basic mechanism of capital flows in the globalized economy, and the key factor for economic development in many countries. Foreign investments are of substantial importance for both the host country and foreign investors. For the host country, foreign direct investment contributes to the growth of business activities, increase of export, and employment, transfer of technology and know- how, management skills as well as to initiation or acceleration of the economic growth and development of the country. Firm specific assets, such as capital, technology, technical, managerial and human resource skills, according to...

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